Successful investing doesn’t end as soon as you hit ‘buy’ in your trading account. This episode of Investing Compass looks at a methodical framework to monitor and maintain your portfolio, to increase your chances of achieving your financial goals.

Monitoring your portfolio includes:

  1. Know how often you are going to review your portfolio
  2. Have your circumstances changed?
  3. Compare your portfolio performance against your required rate of return
  4. Take stock of your asset allocation, and whether it needs to be rebalanced
  5. Assess whether your required rate of return has changed

You can find the full article here.

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You can find the transcript for the episode below:

Shani Jayamanne: Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into consideration your personal situation, circumstances or needs.

Mark LaMonica: Well, Shani, the degree with which you overshadow me was thrown in my face at the recent Australian Shareholders Association Conference.

Jayamanne: I find that hard to believe, Mark. You did speak there. You spoke on a Sunday.

LaMonica: Yeah. So I go in there on Sunday and then I was there on Monday as well. And all these people came up to me and they all kept asking how you were, where is Shani? And like, you’re in Europe. And I’m here like on my Sunday and I was like, okay, well, this is my life now. I go around and people ask me about you and where you are.

Jayamanne: That’s not necessarily true. You got a few invites to come and see people and...

LaMonica: Yeah, somebody asked me if I was ever on the Sunshine Coast.

Jayamanne: Yeah. There you go.

LaMonica: Yeah. I mean, the thing she didn’t add was, bring Shani. But anyway, we’re through with that. We did this in the last episode, but YouTube, subscribe, make Will happy. 97% of people that watch our videos are not subscribed and it makes Will really unhappy.

Jayamanne: Your stats are different in every one that we record.

LaMonica: What was my stat last time?

Jayamanne: 92.

LaMonica: Which is the correct one?

Jayamanne: I think it’s 94. I don’t know. Will, what is it?

William Ton: 92.

Jayamanne: 92. Okay. So you were right the last one.

LaMonica: 97 sounds better. So,92% of people not subscribed. So please subscribe to that. And then we also share the news that we’ve written a book. Stay tuned for that. At this point, they are probably figuring out ways to take my name off of the cover, Shani and Sidekick.

Jayamanne: Wow. Huge pity parties today, Mark.

LaMonica: Exactly. It is Thursday. Okay. Should we get into the episode?

Jayamanne: Yes. What are we talking about today?

LaMonica: Well, we’re going to go through a simple formula with the emphasis on simple to monitor and maintain your portfolio.

Jayamanne: And we’ve done a comprehensive episode very early on in the life of Investing Compass. But this one runs through five main steps that will have you on the right track to meet your financial goals.

LaMonica: And we’re going to start again with our favorite drinking game. I wouldn’t say favorite. I have many drinking games I enjoy, but the one that I talk about on here, and that is of course Warren Buffett’s drinking game, and we’ll quote Buffett. And he said, only buy something that you’d be perfectly happy to hold if the market shut down for 10 years. And this of course embodies the whole notion that investing is a long-term endeavor.

Jayamanne: And we’ve spoken about the Mind the Gap study before on this podcast, but it’s the study that shows the difference between investor and investment returns. Really, what we see here is that the investors tend to stray from this long-term outlook and their returns suffer as a result.

LaMonica: And of course, nobody invests in a vacuum. Buffett’s sentiment about the market being closed for 10 years. It’s a nice quote, like many things that he says. But of course, that isn’t reality. So investors are getting constant feedback in the form of price changes. And it’s really hard to ignore price changes and also really hard not to act upon them.

Jayamanne: So that leads to our discussion today because there are several reasons why investors can’t maintain a long-term orientation. But a primary driver is the approach taken in monitoring their portfolios. And the typical investor will frequently check price changes on individual holdings without any context to assess those price changes.

LaMonica: And that’s because the typical investor doesn’t have a return objective that they need to achieve their goal. Typical investor doesn’t understand why certain holdings are going through these price changes. So we’re going to go through an approach for monitoring your portfolio so that you can do better than the typical investor.

Jayamanne: All right. So let’s start with establishing the foundation to monitor your portfolio. The context to a portfolio review is what you’re trying to achieve by investing in the first place. And that means you’re going to define your financial goals and understand the return you need to achieve your goal.

LaMonica: And this episode is about monitoring and maintaining. So we’re not going to go through that whole process of constructing a portfolio because we have plenty of resources on that. A lot of that is what our book is on. So that’ll be a further resource. But it is important to have because having that set check in point with clear goals reduces the chances of poor behavior.

Jayamanne: If you have a structure around portfolio monitoring and maintenance, it is less likely that you’re going to trade based on market volatility or uncertainty. This is one of the biggest detractors of investor returns.

LaMonica: So what happens if you don’t have structure? Without structure, what usually happens is investors fall into the trap of focusing on portfolio performance against broad market indices and become overly fixated on short term market movements. So let’s do an example, Shani. You might look at your portfolio and see your results and you’re disappointed that your portfolio may not have beaten the ASX 200 for the year. But the goal of your portfolio might be totally different. And obviously that goal is over a longer time period.

Jayamanne: So having structure means that you are able to focus on long term objectives and how investments are supporting or detracting from your efforts to achieve that specific goal that you do have.

LaMonica: Okay, that’s a little context. Let’s go into detailed examples, Shani. So let’s say that in five years, five years into a 10-year goal, so you’re halfway there, and that’s what you’re working towards. And that’s sort of the scenario we have here. So you need to achieve a 6% return per year to get to your goal. The market has returned 8% over this five-year period. So the last five years and your portfolio has achieved a 7% return.

Jayamanne: And at face value, many people would be disappointed that the portfolio has not beaten that market return. And it’s likely that they’re measuring success against this arbitrary benchmark that they have. But in reality, this portfolio is really doing its job and it’s on track to help you reach your financial goals. A structured investor will realize that they’re still on track and an investor with no context may trade based on the results. And that’s where we really see that poor behavior that focuses on the short term instead of the long term.

LaMonica: All right. So now we’re going to go into monitoring and evaluating your portfolio. So this does not need to be hard. It’s not coming complex or does not need to be complex. So first you need to start with knowing how often you’re going to review your portfolio.

Jayamanne: Well, the right cadence really does depend on your personal circumstances like everything else. But some people prefer yearly when they receive the annual statements from their investments and they’re filing their tax return. This may also reduce poor behaviors. They’re not really looking at their portfolio regularly.

LaMonica: Yeah, and one trigger for a review of your portfolio and looking at your investment strategy is if there is a major change to your life or your financial goals. So you could get a significant pay rise. Shani, you can tell me what that’s like because I’ve never experienced it. But that could mean that you can contribute more to your portfolio. You could receive an inheritance or here’s something I’m more familiar with. You could lose your job and you can’t contribute to your investments for a certain time period.

Jayamanne: So I can speak for myself.

LaMonica: As opposed to me speaking for you.

Jayamanne: I prefer half yearly and I prefer this cadence because I use a mid-year review to collect all of my annual statements and have a comprehensive view of my financial position. And I use that second review at the beginning of the calendar year to reflect more deeply on the year ahead and whether there are any changes to my goal or my circumstances. Because this is often when I also have my employment reviews with Mark. So your cadence will really just depend on your circumstances and what works for you.

LaMonica: Shani picks twice a year because that’s when she gets massive pay rise. That’s basically what she’s saying. So I’d say…

Jayamanne: Mark, why don’t you tell me about you?

LaMonica: I will talk about me. So I’d say two things. So I do look at my portfolio a lot. I would say I look at my portfolio too frequently, probably. So at least once a week. And part of this is I think just through my job, I tend to see any big moves and shares or markets right away. So I’m just constantly bombarded with this stuff. And I’m sure you experience that as well, Shani. But really on an annual basis is when I’ll do a big review of my portfolio. So I normally do this in early January and it gives me a chance to reflect on how I’m tracking against my goals and just see if there’s anything amiss in my portfolio. So generally, that’s looking at the allocation to individual positions.

Jayamanne: And it’s likely that you’ll look at your portfolio more frequently than we’ve suggested. And of course, this behavior is completely understandable and normal. It’s very rare to be an investor and choose to only look at your portfolio twice a year. I don’t do that. But use the more formal reviews as impetus to make any major changes to your portfolio and your investment approach.

LaMonica: So what happens if your circumstances have changed? So remember that investing is about you, of course, and what you want to achieve. It’s not about those investments that you hold. So this is why the first step is to review your circumstances. Do you earn more or less? Therefore, are you saving more or less? Have there been unexpected expenses? Just review how any changes in your life may impact your investment strategy. Then compare your portfolio performance against your required rate of return. Obviously, that means you need a required rate of return. So if we go back to that example that we went through, we’re comparing our portfolio performance against what you need to achieve for your goals instead of some arbitrary benchmark.

Jayamanne: And then the next step is taking stock of your asset allocation and seeing whether your portfolio needs to be rebalanced.

LaMonica: So part of the purpose of having structure in your investing process is to understand the asset allocation you need to achieve your goals. So this is intrinsically linked to the required rate of return for your portfolio. You only need a 3% annual return. Your portfolio would be tilted towards more defensive assets. If that return that you require is higher, you would have more growth assets like shares.

Jayamanne: So when you’re evaluating your portfolio, compare your target asset allocation with the current asset allocation of your portfolio. So for example, you’ve determined that you need to have a 40% allocation to Aussie shares to achieve your goal. In the six months since your last review, the Aussie market has done very well and instead of making up 40% of your portfolio, it makes up 50% of your portfolio. So this will form the basis for a decision around rebalancing.

LaMonica: And there are two theories around rebalancing. I guess two credible theories. I don’t know how many other theories there are. The first is that you pick a set interval. For example, you might choose annual. You look at your portfolio and you get it back a line from an asset allocation perspective on an annual basis.

Jayamanne: And the second theory that is instead you use tolerances. You might set a 10% tolerance, which means that if your goal is to have a 60% allocation to equities and it gets to be more than 60% you would rebalance. Another version of this is choosing a range. So you might have a goal that stipulates that you have 60% to 80% allocation to equities. In both these cases, you’re trying not to do it too often as your portfolio will naturally fluctuate with the market.

LaMonica: Yeah. And the reason, of course, that you don’t want to do it too often is because there’s a downside to rebalancing. There are transaction costs and there are likely taxes as you sell things that have gone up in value.

Jayamanne: So the last part of your portfolio review is assessing whether your required rate of return has changed and your required rate of return will need to be recalculated periodically. Your investments may have performed very well and it could mean that you’re ahead of your goal. You may choose to reduce risk in your portfolio if that’s the case. If you’re not on track to meet your goal, you may choose to invest in more aggressive assets.

LaMonica: I think the important point to make here for long-term investors is that missing your required rate of return in one period does not mean it’s some sort of panic event. Alright, so markets will always be volatile and you may be going through a period, markets may be going through a period of poor performance. So just remember that and make sure that you’re looking at a longer period of underperformance or overperformance before you make any sort of change.

Jayamanne: So those are the steps to monitoring a portfolio. With this structure, it’s likely to reduce the poor behavior that you might have and decision making as well and keep you on track to achieve your financial goals.

LaMonica: Yeah, and as somebody who has no structure or discipline in most parts of my life, just remember that monitoring your portfolio is a key part of investing with structure and discipline. Pretending that the market is shut down for 10 years is not the real world. So rather than focusing on short-term performance, we encourage you to align your reviews with your long-term goals, check your asset allocation periodically and rebalance only when it’s necessary.

Jayamanne: And what this approach will do is ensure that you remain on track while avoiding costly mistakes that will harm your total return outcomes like over-trading and chasing performance.

LaMonica: Alright, great. Well, thank you very much for listening, Shani and her Sidekick really appreciated.

(Disclaimer: Any advice in this podcast is general advice or regulated financial advice under New Zealand law prepared by Morningstar Australasia Proprietary Limited and/or Morningstar Research Limited without reference to your financial objectives, situations or needs. You should consider the advice in light of these matters and any relevant product disclosure statement before making any decision to invest. To obtain advice for your own situation, contact a financial advisor.)